Every RRSP Dollar Is Taxed at Death. Only Half Your Capital Gains Are.
Many retirees fund the next year of spending from their non-registered investments and leave the RRSP alone. This year's tax bill stays small. The RRSP keeps growing, though, and so does the tax owed on it, which usually comes due in the year your family is settling your estate. Knowing when that habit helps and when it quietly shrinks your inheritance is the difference between a plan that looks efficient and one that is. The account that saves you tax this year is not always the account that leaves your family the most after tax.
If you've ever sold investments for another year's expenses because touching the RRSP felt like volunteering for a tax bill, you know the relief of putting it off. You may also know the nagging question underneath it: what does all that postponing leave the people you care about?
Why the same account balance can leave your heirs very different amounts
Compare two balances of the same size. Under CRA rules, an RRSP or RRIF is generally added to your income in full on your final tax return. The exception is a qualifying rollover to a surviving spouse or eligible dependant, which defers the tax but doesn't cancel it.
Non-registered capital property works differently. At death it's treated as sold at fair market value, but only the growth above your adjusted cost base is a gain, and half of that gain goes into income. "Half" describes how much counts as income. It's not a 50% tax rate. The included portion is then taxed at your marginal rate, like everything else on the return. A spouse can also receive these assets at cost and defer the gain.
Here's a purely illustrative example. Picture a $300,000 RRIF beside a $300,000 portfolio bought for $200,000. The RRIF adds $300,000 to final-year income. The portfolio has a $100,000 gain, so $50,000 is added. Same balance, very different tax.
Some limits apply. Ordinary stocks, ETFs and mutual funds don't qualify for the lifetime capital gains exemption, which covers qualified small business shares and qualifying farm or fishing property. GIC interest is taxed as income every year, so a GIC carries no deferred gain at all. A TFSA leaves nothing taxable at death, which makes it the cleanest estate asset of the lot.
When a smaller tax bill today means less for your heirs
Go back to that annual spending decision. Spending non-registered money first keeps your taxable income low now. It also lets the RRIF grow until the entire balance lands on one final return, often stacked into the highest brackets, especially after the second spouse dies.
Drawing a measured amount from the RRSP or RRIF each year, enough to use a lower bracket you'd otherwise leave empty, can cost less over your lifetime than one large hit at the end. It isn't automatically better. Extra income can trigger the OAS recovery tax. You give up some tax-deferred growth. And the non-registered money you keep pays tax every year on its interest, dividends and realised gains.
A useful comparison answers these questions:
What tax bracket are each of you in now, and what bracket will the survivor's final return likely hit?
Would higher withdrawals push either spouse into OAS recovery tax?
What are the adjusted cost bases in your non-registered accounts, and do you have capital losses available to offset gains? Selling or gifting appreciated investments during life generally triggers the gain rather than erasing it.
Under each withdrawal order, how much can you spend each year after tax, and how much would your heirs receive after tax?
The last question carries the most weight. Judge lifetime spending and the inheritance together. A single year's tax bill or an account balance seen alone tells you very little.
An untouched RRSP has a tax bill attached that hasn't arrived yet, so it isn't automatically a protected inheritance. Your first move is simple: ask your planner to model your current withdrawal order beside a measured registered-first alternative, showing both your retirement cash flow and what your heirs keep. Paying some tax on purpose can be the sensible choice, but only when that comparison supports it.
Many retirees fund the next year of spending from their non-registered investments and leave the RRSP alone. This year's tax bill stays small. The RRSP keeps growing, though, and so does the tax owed on it, which usually comes due in the year your family is settling your estate. Knowing when that habit helps and when it quietly shrinks your inheritance is the difference between a plan that looks efficient and one that is. The account that saves you tax this year is not always the account that leaves your family the most after tax.
If you've ever sold investments for another year's expenses because touching the RRSP felt like volunteering for a tax bill, you know the relief of putting it off. You may also know the nagging question underneath it: what does all that postponing leave the people you care about?
Why the same account balance can leave your heirs very different amounts
Compare two balances of the same size. Under CRA rules, an RRSP or RRIF is generally added to your income in full on your final tax return. The exception is a qualifying rollover to a surviving spouse or eligible dependant, which defers the tax but doesn't cancel it.
Non-registered capital property works differently. At death it's treated as sold at fair market value, but only the growth above your adjusted cost base is a gain, and half of that gain goes into income. "Half" describes how much counts as income. It's not a 50% tax rate. The included portion is then taxed at your marginal rate, like everything else on the return. A spouse can also receive these assets at cost and defer the gain.
Here's a purely illustrative example. Picture a $300,000 RRIF beside a $300,000 portfolio bought for $200,000. The RRIF adds $300,000 to final-year income. The portfolio has a $100,000 gain, so $50,000 is added. Same balance, very different tax.
Some limits apply. Ordinary stocks, ETFs and mutual funds don't qualify for the lifetime capital gains exemption, which covers qualified small business shares and qualifying farm or fishing property. GIC interest is taxed as income every year, so a GIC carries no deferred gain at all. A TFSA leaves nothing taxable at death, which makes it the cleanest estate asset of the lot.
When a smaller tax bill today means less for your heirs
Go back to that annual spending decision. Spending non-registered money first keeps your taxable income low now. It also lets the RRIF grow until the entire balance lands on one final return, often stacked into the highest brackets, especially after the second spouse dies.
Drawing a measured amount from the RRSP or RRIF each year, enough to use a lower bracket you'd otherwise leave empty, can cost less over your lifetime than one large hit at the end. It isn't automatically better. Extra income can trigger the OAS recovery tax. You give up some tax-deferred growth. And the non-registered money you keep pays tax every year on its interest, dividends and realised gains.
A useful comparison answers these questions:
The last question carries the most weight. Judge lifetime spending and the inheritance together. A single year's tax bill or an account balance seen alone tells you very little.
An untouched RRSP has a tax bill attached that hasn't arrived yet, so it isn't automatically a protected inheritance. Your first move is simple: ask your planner to model your current withdrawal order beside a measured registered-first alternative, showing both your retirement cash flow and what your heirs keep. Paying some tax on purpose can be the sensible choice, but only when that comparison supports it.
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